Teamwork Challange Concept.

The Value of the WTO

Alan Wolff is the current Deputy Director General of the World Trade Organization. What follows is an excerpt of a speech Mr. Wolff delivered on November 13, 2017 at the Center for Strategic and International Studies. TradeVistas presents it here as the first of two articles.

“Safety net,” “essential stability”

As a new resident in Geneva, in preparing these remarks, I consulted with a number of WTO Ambassadors to the WTO as well as senior members of the secretariat. A WTO member country representative from one of the smaller country members put it to me this way: the fundamental role of the WTO is to function as a safety net. This is true for larger members as well. Bilateral and regional arrangements can collapse – which is potentially the case with respect to NAFTA and Brexit, but with the WTO-based world trading system in place there is a fall-back.

Several secretariat members offered a bottom line value to the WTO in slightly different but consistent terms: that the chief value of the WTO system is providing essential stability without which business would have far less certainty. Without the WTO system in place, economic activity — both cross border and domestic – would be sharply reduced.

Anyone who cares about either the level of economic activity for a country or for a company should pause and consider that truth.

“If the WTO did not exist, it would have to be created”

Viewed through a lens focused on structure, the WTO provides a unique system of governance found in no other international arrangement. No regional or bilateral agreement can replace it. It is the foundation upon which all regional and bilateral agreements build. Without the WTO, the world economy would be fragmented, as it was before the Second World War, and which in the view of some historians, was a factor that made that war more likely. In today’s world, trading relationships could degenerate into an unhealthy regionalism. In addition, without the WTO, there would be no adequate counter to domestic demands for protection, particularly in agriculture, where food security as well as interest politics play a role. As one major country’s trade minister — a critic of the WTO — is reliably reported to have said, “If the WTO did not exist, it would have to be created”.

“The trading system is tested daily”

The trading system is tested daily, not just at times of a global economic stress. Governments the world over are daily creating new requirements, many of which can affect trade. In doing so, I believe that WTO members generally live up to the WTO rules, at least where the rules are unambiguous. They do not cross clear black lines often. It is impossible to determine whether this is because there is certain retribution under binding dispute settlement, but it certainly may be a factor.

Beyond these fundamentals, there are three main functions of the WTO (1) seeing to the implementation of the existing rules; (2) providing for the settlement of trade disputes, and (3) negotiating new rules.

The perennial work the WTO does not get news coverage but it is vitally important. High on the list of areas of the WTO rules and processes that work well are product standards (technical barriers to trade) and sanitary and phytosanitary standards (SPS). Member countries are generally very good about notifying standards, including proposed standards, and they are willing to take questions and to supply answers. While a tariff in most instances can only slow trade, a standard can stop it, and over 90 percent of world trade is governed by standards. This is a technical area that to the public as well as to senior national policy makers is likely to be mind-numbing, but without this work on technical barriers, world trade flows could seize up, with dramatically adverse consequences.

In the area Sanitary and Phytosanitary (SPS) area, the WTO’s rules strike a careful balance between the rights of Members to adopt measures to promote human, animal and plant life or health while not creating unnecessary barriers to trade. By ensuring a common understanding and uniform application of the rules, the SPS Committee promotes the free flow of goods.

The Committee has also worked assiduously over the years to enhance transparency and predictability of SPS measures through ensuring that Members not only notify their draft SPS regulations for comments by other Members before they are finalized. By affording trading partners this opportunity, it increases predictability that Members’ measures will not be arbitrary and that they will conform to international standards where they exist. It reduces trade disruptions and prevents conflict and disputes. Misunderstandings can be resolved before the finalization and implementation of the measures.

The value of joining the WTO

An area of value of the WTO that stands out for me is the process for new countries acceding to the organization.

It may be that the governments of long-time WTO members take the system for granted and therefore perhaps undervalue it. I am very fortunate to oversee the Accessions Division, and I can assure you that the countries that wish to join the WTO have made clear-eyed evaluations of the costs and benefits of WTO membership, and have concluded that the benefits far outweigh the costs. Indeed, these countries must be secure in that calculus, as the accessions process is both long and arduous.

Those seeking membership in the WTO as well as those gaining membership most recently regard joining the WTO as crucial to their economic well-being. In many cases, they are countries that have recently suffered very severe economic dislocations.

Liberia was recovering from civil war when Ebola hit in 2014. It completed its accession negotiations in 2015 and is an ardent supporter of WTO accession as a means to drive economic and legal reforms and rebrand itself as a destination for foreign investment.

Afghanistan is the 164th member, so the most recent to accede. It sees WTO membership as creating a basis for restoring its war-torn economy as a transit hub between South Asia and Central Asia, and between South Asia and Middle East.

Timor-Leste and perhaps soon South Sudan will embark on the WTO accession journey as part of statehood building after long struggles and a bitterly gained independence 2012.

Somalia seeks membership to assist in its recovery from serious dislocations. It seeks to realize the potential of its geographic assets – with the longest coastline in Africa and Middle East and its strategic location between the Gulf Aden and the Indian Ocean.

These nations’ difficult experiences remind us of the importance of fostering strong and stable nations through economic integration.

It would be very good if, just as immigration has contributed to keeping the economies of countries with aging populations vibrant, the newly acceding countries might have the same effect on the WTO. Since 1995, when the WTO came into being, 36 countries have completed their accessions to the WTO. Twenty-one countries are in the process of acceding to the WTO. They are of different size and economic conditions, but all have the ability to use WTO membership and accession to pursue their domestic reforms and their integration into the global economy. They all share a common vision — to be part of the WTO whose rules govern the conduct of over 98 percent of global trade.

The value of setting disputes

Besides an arrangement providing substantive rules, also to be weighed in the balance is the value of WTO dispute settlement. This is often referred to as a jewel of the WTO system, but if it is, one major member has identified several flaws in this diamond, and there is a serious question at this point about its future. The United States takes the position that systemic reform is needed before consideration can be given to filling the vacancies on the WTO`s Appellate Body. At present two seats out of seven are empty. Next month, there will be three vacancies. Clearly a solution must be found.

This has to be a matter of major concern. At some point next year, the dispute settlement process could become paralyzed. If and when that occurs, unilateral action and reaction could take place with high risks for the world trading system. This could occur if a complainant wins at a WTO panel and the respondent country rather than removing the offending measure, appeals, but it is an appeal that cannot be heard because the Appellate Body is not fully functional. The complainant decides to take matters into its own hands and retaliate, and the respondent decides to respond in kind. Without enormous self-restraint that kind of situation can pose serious systemic risks.

Why the current impasse? The United States points to the Appellate Body’s exceeding its authority. It cites as a prominent example, the Appellate Body making a rule that its members would be allowed to serve on cases after their terms had expired if they had served on the case during their term of office and a decision had not yet been issued. The United States says that this is a matter for members to decide, and not a matter to be determined by the Appellate Body itself. There appears to be a fair amount of agreement among WTO members with whom I have spoken that it would be best for the members, acting through the Dispute Settlement Body to make the required decision, but there is no support for the blocking of appointments by the United States.

Fortunately, thought is being given by concerned WTO members as to how to resolve the current impasse. It is a near-term test of the ability of trading countries to cooperate to find mutually acceptable solutions.

Four foundational rules

The WTO consists of many rules, but in my view, four are absolutely central. The fact that tariffs are contractually bound and the use of quotas is generally banned is of paramount importance to the world economy. Equally, the two cornerstones of the multilateral trading system — national treatment and the most favored nation obligation — are indispensable.

The presence of these four deep and broad WTO commitments was a primary factor in preventing the deep recession due to the financial crisis in 2008 from turning into a second Great Depression. That is no small accomplishment.

Part two is published on December 14, 2017. The author wishes to be clear that the views above are his own, not those of the Secretariat or WTO Members.